American Capital Ltd.’s (ACAS) first-quarter 2012 operating income of 14 cents per share lagged the Zacks Consensus Estimate by 5 cents. Moreover, the results were below the prior-year quarter’s earnings of 23 cents per share.
The unfavorable outcome was due to a fall in interest and dividend income in the quarter. Yet, decreased operating expenses partially offset the decline.
Net operating income for the quarter was $49 million, significantly down from $83 million in the prior-year quarter. Net earnings for the quarter were $580 million, or $1.71 per share compared with $434 million or $1.21 per share in the prior-year quarter.
Performance in Detail
Total operating income was $149 million in the quarter, down 6% from $159 million in the prior-year quarter, due to lower interest and dividend income. Yet, operating income surpassed the Zacks Consensus Estimate of $137 million.
Total interest and dividend income for the quarter was $136 million, down 7% from $146 million in the prior-year quarter. The weighted average effective interest rate on the company's private finance debt investments as of March 31, 2012, was 11.1%, growing 40 basis points from the end of the previous quarter and 80 basis points higher than the rate as of March 31, 2011. Fee income was stable at $13 million compared to prior-year quarter.
Operating expenses declined 11% year over year to $68 million. The fall in expenses was attributable to significant decline in interest expenses, partly offset by higher general and administrative expenses.
As of March 31, 2012, non-accrual loans were $178 million, representing 8.1% of total loans at fair value, down from $219 million of non-accrual loans, indicating 8.7% of total loans at fair value, as of December 31, 2011.
Net asset value (NAV) per share came in at $15.71, up 13% or $1.84 per share from NAV of $13.87 per share as of December 31, 2011. In spite of the volatile capital markets in the quarter, affecting valuations of investment portfolio, the overall underlying performance of American Capital’s portfolio companies continued to be positive. Management not only anticipates an improvement in the portfolio along with an economic recovery, but also expects to post a growth in book value.
American Capital’s asset coverage ratio improved substantially to 552% from 465% in the prior quarter. The company repaid securitized debt of $118 million and increased investments by $83 million while strengthening its balance sheet.
Share Repurchase and Dividend Update
During the first quarter of 2012, American Capital repurchased 5.5 million shares worth $48 million, at an average price of $8.79 per share.
In second half of 2011, American Capital adopted a new program for additional repurchases of shares or dividend payments. In April 2012, the company's Board of Directors extended the program through December 31, 2013. As per the program, American Capital will keep aside certain amount either for stock repurchases or dividend payments, quarterly. The quarterly amount will depend on the company’s cumulative net cash from operating activities in the prior quarters.
Further, cash and cash equivalents in hand, cumulative repurchases or dividends, debt position, investment plans and operational issues will also be the determining factors for the quarterly amount. Last but not the least, the current trading price of American Capital's common stock, financial liquidity and ongoing economic conditions will also be taken into consideration.
As per the company’s plan, if the price of American Capital's common stock trade at a discount to the net asset value of shares, the company will opt for share repurchase. On the flip side, if the price of American Capital's common stock trade at a premium to the net asset value of shares, the company will opt for dividend payments.
Such programs raise our hopes for enhanced investor confidence.
Developments during the Quarter
In February 2012, American Capital announced the divesture of its portfolio company Aptara Inc. An international Business Process Outsourcing organization, iEnergizer Limited, acquired the unit in early-February 2012 for $144 million. This was the first company in 2012 that American Capital has sold out among its portfolio companies. The company has earned 17% compounded annual rate of return over the life of its total senior, mezzanine debt and equity investments, including interest, dividends and fees.
In January also, American Capital announced the divesture of its portfolio company CIBT Solutions Inc. (:CIBT). The unit was acquired by ABRY Partners in mid-December 2011 for $215 million. The company has earned 15% compounded annual rate of return over the life of its total debt and equity investments, including interest, dividends fees and expected escrow proceeds.
Our Viewpoint
American Capital’s successful restructuring of debt provided it with sufficient operating flexibility and the company also continues to derisk its balance sheet through a number of initiatives including repayment of debt.
American Capital has the capability to provide flexible financing solutions ranging from a variety of senior debt and uni-tranche to mezzanine and equity co-investments. Further, the company provides multi-currency funding with underwriting platform globally, thereby boosting the growth of its portfolio companies. Such benefits provided by American Capital urge private equity clients to consider it as an investment partner, which in turn, helps it to grow.
However, we believe that the lower top-line growth remains a headwind, though the improved portfolio performance is expected to continue with the economic recovery.
American Capital currently retains its Zacks #3 Rank, which translates into a short-term (1−3 months) ‘Hold’ rating. Considering the fundamentals, we also maintain a “Neutral” recommendation on the stock.
Among American Capital’s peers, Main Street Capital Corporation (MAIN) is scheduled to release its first-quarter 2012 earnings on May 3, while Apollo Investment Corporation (AINV) will be releasing its fiscal fourth-quarter 2012 results on May 23, 2012.
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